Study: Retailers' shrink reduction efforts pay off

June 30, 2015
Despite improvements, criminologist says industry needs to remain diligent

With each passing year it seems as though shrink statistics for retailers become even bleaker than the last. Shoplifting and employee theft are nearly always trending upwards despite the best efforts of loss prevention departments. Finally, however, there may be a bit of good news on the shrink front.

According to the 2015 National Retail Security Survey conducted by University of Florida in partnership with the National Retail Federation, inventory shrink averaged 1.38 percent of retail sales in 2014, resulting in the loss of $44 billion. Although the amount lost to fraud is significant, this year’s shrink percentage is the lowest recorded in the history of the survey which is now in its 24th year.

“I was surprised that (shrink) dropped as much it had, but it has been decreasing over the past few surveys,” said Dr. Richard Hollinger, criminology professor at the University of Florida and lead author of the NRSS. “I think the lowest that it has gotten before this is 1.45 percent. If you look at 2012, I think the number was 1.47 percent, so it was clearly decreasing and we didn’t see the really, really high numbers that we saw in the 1990s.”  

Hollinger added that one of the primary reasons why shrink numbers have declined over the past decade or so may be due to the fact that a lot of the retail outlets that suffered a high rate of theft, such as record stores, are no longer in business and thus not part of the survey. With that being said, Hollinger believes that low shrink rate is “good news” for the industry as it shows retailers are making progress, particularly large retailers which make up a significant portion of the survey.

Retailers cannot rest on their laurels, however, as the survey, which included responses from 100 senior loss prevention executives, also found some areas of potential concern. Chief among these is the fact that in another first for the survey, shoplifting/external theft (38 percent) accounted for a higher percentage of inventory shrink than employee/internal theft (34.5 percent). Other leading causes of shrink include: administrative and paperwork errors (16.5 percent), vendor fraud or error (6.8 percent) and unknown loss (6.1 percent).

“For years, I have been criticized by some retailers who didn’t believe that internal theft was bigger than the shoplifting numbers and that’s been the case for the over 20 years we’ve done this study,” said Hollinger. “This year, for the first time, that number flipped so that a larger portion of the loss was attributed to shoplifting and organized retail crime as opposed to internal theft. It was always difficult, and I guess this is human nature, for any business to admit that its’ own staff is doing more damage than the outside professional criminal or shoplifter. My assumption is that’s a reflection of increasing organized shoplifting and organized retail crime. At the same, retailers are doing a better job of monitoring their own staff. Some of that is done through video analytics or various types of software that can drill down and find out where employees might be stealing.”   

Of the retailers studied, grocery stores and supermarkets reported the highest levels of shrink at 3.23 percent. Men’s and women’s specialty apparel retailers and department stores experienced a shrink average of 1.22 percent, while sporting goods and recreational products retailers saw shrinkage of 1.17 percent.

The study also found security and loss prevention budgets are either greater or flat this year compared to last for three-quarters of the retailers surveyed. Nearly 40 percent of retailers surveyed said that their loss prevention budget is increasing in 2015, while around 24 percent said that they would be dealing with a lower budget than last year.  

When taken altogether, Hollinger said that the $44 billion lost annually to shrink still makes it the most costly property crime in the nation. “Auto theft doesn’t come close, bank robbery doesn’t come close, there’s no other property crime number that comes close to $44 billion a year,” he said.  

Although the survey didn’t address it specifically, the issue of organized retail crime also figures prominently in retail shrink across the U.S.

“There are more and more organized retail crime gangs being caught and when they are caught, the amount of theft they are responsible for is much larger than what we saw before these gangs became organized,” said Hollinger. “Shoplifting has been around forever, since the beginning of retail, and there have always been more sophisticated or what we call professional shoplifters, who make a living off of it but now from what I can tell - a number of my students and I have been trying to study this – it is like traditional organized crime but it is just focused on the retail industry. These gangs of thieves are using a lot of skills, they’re doing investigations prior to the thefts, they work as an organized team, they have rules, and they may be involved with other types of organized crime like terrorism around the world, so this is a huge problem.”  

Hollinger credits the leveraging of security technology and video surveillance as a major force in helping retail organizations put a dent in their shrink levels.

“Video analytics is one of those technologies that has really paid off and allowed them to do two things: one is reduce shrink, but also not have to increase staff,” said Hollinger. “In many ways, what they’re trying to do is keep the staff that they have dedicated, particularly on the floor, as low as they possibly can because that is a fixed cost. It doesn’t matter how much you sell, having staff on the floor is a fixed expense and probably one of the larger expenses they have to pay for.”  

Retailers also appear to increasing their efforts to create more diversity in their loss prevention departments as the survey found that an average of just over 23 percent of LP manager-level or higher staff is filled by women. According to the survey, on average, almost one in 10 LP management-level staff is Latino, 7.7 percent is African-American and 3.6 percent is Asian.

Hollinger really credits the retail industry and the NRF, in particular, for stepping up and taking notice of how widespread the problem of shrink is and trying to educate the industry about what they can do to curb it.

“That shows, I think, that the retail industry is really serious about this problem,” he said. “They are obviously arguing for legislation to give them more power and more ability to prosecute these organized gangs and organized crime cases. When I first started doing this research, oftentimes retailers would say, ‘Well, shrink is just a cost of doing business, we’re just going to have to tolerate it.’ Here we are 24 years later and I think that is clearly not the case, they are not going to tolerate it anymore.”